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  • Direct Costing Is A Method of Costing in Which The Product Is Charged With Only Those Costs Which Vary With Volume

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    Direct costing is a method of costing where a product is charged only for variable costs associated with production volume. It results in income statements and profits that vary with sales volume rather than production. Inventory valuation and product costs under direct costing exclude fixed costs, leading to potential understatement of inventory value and underpricing of products compared to absorption costing which incorporates fixed costs.

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    Direct Costing

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    Direct costing is a method of costing where a product is charged only for variable costs associated with production volume. It results in income statements and profits that vary with sales volume rather than production. Inventory valuation and product costs under direct costing exclude fixed costs, leading to potential understatement of inventory value and underpricing of products compared to absorption costing which incorporates fixed costs.

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    28 views2 pages

    Direct Costing Is A Method of Costing in Which The Product Is Charged With Only Those Costs Which Vary With Volume

    Uploaded by

    ravina10008
    Direct costing is a method of costing where a product is charged only for variable costs associated with production volume. It results in income statements and profits that vary with sales volume rather than production. Inventory valuation and product costs under direct costing exclude fixed costs, leading to potential understatement of inventory value and underpricing of products compared to absorption costing which incorporates fixed costs.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
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    Direct Costing

    Direct costing is a method of costing in which the product is charged with only those costs which vary with volume.

    Direct Costing and Absorption Costing: Distinction


    Features of the Systems 1. Income statements Direct costing Easier for non-accounting operating personnel to understand. Profits vary with changes in sales volume. Inventory value excludes fixed costs and understates the value of the inventory. Product cost understates the true product cost. Absorption costing Complicated by effect of over and under absorbed overhead on reported profit. Profits vary with production volume rather than with sales volume. Inventory value includes fixed costs and is therefore fully valued. Products are fully costed.

    2. Difference in reported profit by two methods 3. Inventory valuation

    4. Product costs

    5. Product pricing

    Understatement of product costs could result in under priced products.

    Absorption costing would reduce the possibility of under pricing.

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